Maximising the value of your company in a sale is a complex and subtle process that starts years before a transaction actually takes place. From the outset, every major strategic decision taken by you and your board has an implication for value on exit. The right preparation and strategic actions can have a positive impact on a company’s sale value, while a lack of forethought and planning will result in a loss of potential value.
Key areas to consider are:
Product strategy and market positioning
The market you sell into and the products or services you offer will affect what kind of exit you are likely to achieve. If you operate in a high growth market, where your potential buyers are highly valued themselves, you are more likely to be able to command a higher valuation multiple on exit. A commanding leadership position in a high growth niche tends to be worth more than a small share of a larger market, as it opens up strategic value to potential buyers by enabling a new market which may be important to them.
Partnerships and strategic relationships
Developing partnerships or strategic relationships with companies that are potential acquirers can ‘create’ your eventual buyer. If you work closely with them, you can start to make them dependent on you, which can help drive up your value. Most large companies will maintain a “list” of companies that they are interested in, so it’s worth investing the time to get to know them, and for them to get to know you, to make sure you are on the list.
Customer contracts and relationships
High customer concentration is a risk, not only for your business but also for potential acquirers, as the risk to revenue of the loss of one key account is high. A broader number of customers with good long term relationships is likely to generate more value in a sale than a scenario where you are very dependent on a small group of customers. Where you sit in the value chain is also important – in general the closer you are to owning the end customer the greater your value.
Barriers to entry (including intellectual property)
For technology businesses in particular, the creation of high barriers to entry will drive up value. If applicable, protection of proprietary intellectual property is a key part of the value proposition. In this case it’s important to have a well thought out intellectual property strategy, with the right patents in the right countries, particularly those geographies that will be important to potential buyers. Other barriers to entry might include scale, for example the creation and domination of a particular market, such as Uber or Airbnb.
How you decide to fund your business will not only affect not only how much of it you own when you exit, but might also affect your ability to control the outcome. Bringing in external shareholders such as venture capital or private equity means entering into a partnership which allows your shareholders a say in decision making, and a dilution of your control. Therefore, it is very important to ensure (prior to accepting their money) that your interests and objectives are aligned with those of any new shareholders, including agreeing on the timeframe and the milestones for an exit.